Upcoming Travel: Kansas, Australia, Spain, & Lithuania…

Las Vegas

Australia (Melbourne)

(And somewhere in Europe for the week in the middle of these two countries, unsure for now, but open to ideas! Shoot me a message if you would like to setup a meeting.  )



Also, Omaha at some point but may be getting rescheduled.

The Best Tweets in June

Would You Rather Own The Unicorns, or Facebook?

Back in 2000 I was a biomedical engineering student at Virginia (who happens to be in the College baseball World Series, go Hoos!).  I was in love with genetics and all things biotech, but also spent plenty of time reading annual reports and buying and selling (often shorting) stocks.  One of the classes I enrolled in outside of engineering (if you are an engineer you realize there are not a lot of those electives available) was a Security Analysis class taught by Tiger Cub John Griffin (Blue Ridge).  There are a handful of old posts on the blog on the topic (old posts here and here as well as in Ivy Portfolio).  I can count about 5 hedge fund managers that were in that small class alone.

The final for the class was to present a stock idea in front of the class and a panel of judges (other HF managers).  Being the biotech guy of course I picked a single biotech stock long that probably round tripped up 100% down 50% over the course of the semester (Human Genome Sciences HGSI).  Needless to say it was an exciting time with the genome being sequenced and all the internet craziness going on.

Anyways, the point of this post was I recall a stat that floated around at the time I used in my talk in general about the biotech space.  Despite the bubbly-ness of the environment, long term, “would you rather own all of the entire biotech space or just one Pfizer? ”  It compared # of drugs in the pipeline, R&D spend, sales, and market cap.  The thesis was that for a similar market cap you could get a much better portfolio of future potential growth, albeit with less short term profits and sales.

(If anyone can find the table from 2000 and/or current I’ll update the blog post.)  Updated: Here is a chart in 2008 – oddly enough it doesn’t seem like Burrill and Co exists anymore?


Let’s see how the biotech vs. Pfizer bet worked out.  Below is a chart from Jan 2000-summer of 2002, and sure enough biotech got spanked hard.  The (bio)tech mkt cap bubble hammered stocks (except dividend and small caps did ok).  Nothing like a 70% drawdown to wash out all the weak hands.

Click to enlarge all charts.


Then, as memories of the bubble faded away, look what happened the next 12 years…for those counting that is a 13 bagger compared to a half bagger. Even before the massive run it wasn’t even close.  Now, to be fair some of this is just capitalism and the failures of market cap weighting, but the outperformance is striking.


Recently the folks at a16z posted a long slideshare that included the below chart – all the unicorns (private tech stocks over $1B in valuation) are valued at less than one Facebook.  Are the unicorns overvalued?  Probably.  will they get mauled in the next bear?  Likely.  But what would you rather own for the next 10-15 years?  A basket of high growth small/midcap techs or just one Facebook?



Three-Way Model

My readers know I am a trendfollower at heart.  I originally sent this to The Idea Farm but received so many questions I figured I would post here too.  This study was completed by Ned Davis Research, and could not be more simple.  (Similar in theory to our old QTAA paper from 2007, as well as systems by Cambria, Dorsey among many others.)

Three asset classes: Stocks, bonds, gold.

Invest equally in whatever is going up (defined as 3 month SMA > 10 month SMA).

That’s it.  Thumps the stock market with less risk.  I went and re-created it on my own for fun and you can see the results below. Before you email me a gazillion questions, realize that momentum and trend are nothing new (been around over 100 years), and many allocations and systems have similar properties.   I’d suggest reading our white papers, 4 books, and searching the blog archives for momentum or trend.  Idea Farm members also get an Excel sheet to go play around and backtest simple mo and trend strats on their own.

People love trying to boil the ocean (what about investing in foreign? Should I invest my cash in TIPS instead of bonds?  What about shorting? etc etc) but much like our new book, the specifics don’t matter much.  What does matter in this case is you are investing in what is going up, and not what is going down.

Click to enlarge.





Original inspiration from NDR



Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

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Should A Robot Be Managing CalPERS Portfolio?

I think we are in the midst of a profound change in the way real money institutions invest.  It is becoming increasingly clear that many real money institutions (pensions, endowments, etc)  don’t offer a heck of a lot of alpha or value add to their investment process.  The top Harvard and Yale’s potentially do, but even some call that into question.

My firm was the first to launch a 0% management fee ETF, and will likely launch more in a series of what a friend calls “investable benchmarks”.  It will be fun to see if the endowments can beat the hurdle of a simple buy and hold ETF.  More than likely, you will have a stratification of institutions into allocating to super cheap beta through ETFs, and then focusing their value add in some areas that may still offer value such as illiquid or liquid alts (timber, PE, managed futures, etc).

Below is an example of one of the big funds, the $300 billion CalPERS and portfolio returns from 1990-2013.  I included two portfolios from our recent book Global Asset Allocation now available on Amazon as an eBook.   (If you promise to write a review, go here and I’ll send you a free copy.)  If you already read the book, you know my thesis for buy and hold investing is that the allocation doesn’t matter that much, but fees do.

As you can see, CalPERS would have been just as well off just firing their whole staff and buying some ETFs.  It would certainly make the record keeping a lot easier!  And they would save a whopping $500 million a year on operating costs (2,700 employees) and another few hundred million on external fund fees.  And you get to avoid all that nasty press on how much you are paying those evil hedge fund managers and their performance fees (disclosure, written by someone with two private funds).

Click to enlarge.  (Thanks to all the people that sent over the performance back to 1990.)




This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


“You can’t control the market, but you can control what you pay.  You have to try to get yourself on automatic pilot so your emotions don’t kill you.” – Burton Malkiel, author of A Random Walk Down Wall Street

The most important principle for all investors is that they have a plan and process for investing in any environment, regardless of how improbable or unfathomable that may be. Are you prepared for all of the possible outcomes, such as declines of 50-100% in any one asset? Are you prepared for currency devaluations, but also massive rallies in stocks or bonds? Can you fathom a world with interest rates at 0.1%? What about at 10%?

Modern portfolio theory holds that there is a tradeoff for investing in assets – you get paid to assume risk.  One of the biggest things you can do for your portfolio is to remove your emotional decision-making.  Look at the below chart and notice when people were most excited about stocks and most depressed.  The exact wrong times!  Study after study has shown how bad people are at timing their investments. (It’s not just individuals—it happens to professionals as well.)

FIGURE 43 – AAII Sentiment Survey


Source:  AAII

Thus, first you need to get your emotions in check and have a plan.  Then don’t do dumb stuff when it gets hard.  Easier to say than do, but very necessary.


We said in our first book The Ivy Portfolio that rebalancing matters, as long as you do it sometime.  The timeframe isn’t all that important, and doing a yearly, or even every few year rebalance is just fine.  Yearly is just nice since it lets you review your investments, as well as make tax optimal changes.  If the accounts are taxable, tax harvesting the losses on a consistent basis can add to your after tax returns.  Below is the global market portfolio (GMP) from earlier in the book rebalanced monthly and never, and you can see rebalancing or not the returns are quite similar, and differ by less than 0.50% per year.  But 0.50% per year is worth rebalancing for!  The nice thing about using an allocation ETF, mutual fund, or automated investment service is that the investment manager does the tax harvesting and rebalancing for you.

FIGURE 44 – Rebalancing Portfolios


Source: Global Financial Data



Next, let’s chat fees.  Below are some ballpark fees for perspective:

  • The average financial advisor charges 0.99 % per year. (Although the most expensive quarter of advisors charge over 2% per year.)
  • The average ETF charges 0.57% per year.
  • The average mutual fund charges 1.26% per year.

Source: PriceMetrix , Morgan Stanley, 2013

To let people know just how important fees are, below is an example.

What if you could predict the single best performing asset allocation ahead of time?

We took the best performing strategy, El-Erian, and compared it to the worst, the Permanent Portfolio.  (Note we are just using real absolute returns and not risk adjusted where Permanent would rank much higher.)

What if someone was able to predict the best-performing strategy in 1973 and then decided to implement it via the average mutual fund? We also looked at the effect if someone decided to use a financial advisor who then invested client assets in the average mutual fund.  Predicting the best asset allocation, but implementing it via the average mutual fund would push returns down to roughly even with the Permanent Portfolio.  If you added advisory fees on top of that, it had the effect of transforming the BEST performing asset allocation into lower than the WORST.  Think about that for a second.  Fees are far more important than your asset allocation decision!

Now what do you spend most of your time thinking about?  Probably the asset allocation decision and not fees!  This is the main point we are trying to drive home in this book – if you are going to allocate to a buy and hold portfolio you want to be paying as little as possible in total fees and costs.

 FIGURE 45 – Asset Class Real Returns, 1973-2013



Source: Global Financial Data

There are many great advisors and brokers out there that charge reasonable fees.  And many advisors offer value-added services, such as financial and estate planning and insurance. Vanguard estimates the value of financial advisors can far outweigh the costs – mostly because they prevent you from doing even dumber things that you would do on your own.

However, if you are just looking for investment management services, you can simply buy a portfolio of ETFs, an asset allocation ETF or mutual fund, or enroll in any number of automated investment services (also called robo-advisors).  There are a number of asset allocation ETFs that charge around and below 0.30% per year for a diversified global portfolio.

Below is a list of some automated services and their fees for a $100,000 portfolio.  For comparison, here are a number of other famous investment advisors and their fees – you may be surprised you are paying your advisor up to and over 2% per year.



  • Schwab Blue                                                    0%
  • Vanguard Personal Advisor Services                30%
  • Betterment                                                    15%
  • WealthFront                                                   25%
  • Liftoff                                                             40%
  • AssetBuilder                                                   45%

Recall that for a $1 million portfolio, a 2% fee is $20,000 per year.  Instead of it being automatically deducted from your account, imagine literally carrying a briefcase full of cash to your advisor each year – that may change your perspective!


“One of the most serious problems in the mutual fund industry, which is full of serious problems, is that almost all mutual fund managers behave as if taxes don’t matter.  But taxes matter.  Taxes matter a lot.” – David Swensen

For a longer review on fees and taxes, take a look at “Rules of Prudence for Individual Investors” by Mark Kritzman of Windham Capital.  It goes to show just how much alpha a mutual fund or hedge fund needs to generate just to overcome their high fees and tax burden (quick summary: it’s A LOT).  Another good articles is John Bogle’s “The Arithmetic of “All-In” Investment Expenses”.

We’re not going to dwell on taxes too much, but we leave you with the simple advice to place all the assets you can in a tax-deferred account. Further, any taxable assets should be managed in the most tax-efficient way possible with tax-harvesting strategies.  ETFs are often a superior tax vehicle over mutual funds or closed end funds due to their unique creation/redemption feature.  The website ETF.com has a good education center for those looking for more information on ETFs.



This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


“I believe in the discipline of mastering the best that other people have ever figured out.  I don’t believe in just sitting there and trying to dream it up all yourself.  Nobody’s that smart.” – Charlie Munger

The funny thing about all the various iterations of our 13 asset class building blocks is that you can basically simplify them into three broad categories: stocks, bonds, and real assets.  We selected one allocation from each chapter for a comparison (otherwise it wouldn’t fit on one page).  The criteria wasn’t that sophisticated – we just tried to pick the most heralded allocation from each chapter.

Once you do simplify the exposures, you can see below in Figure 40 that many of the allocations have fairly similar broad exposures.  The exceptions are 60/40 and the Buffett allocations since they place zero in real assets.   Note that many of the allocations were recommended to the public at different times over the years, and the later recommendations possibly benefitted from knowledge of past returns.  However, as we show below, it really doesn’t matter that much!


FIGURE 40 – Asset Class Broad Allocations




Most of the allocations moved together in a similar fashion.  However, the allocations that performed the best in the inflationary 1970s then turned around and performed the worst in the disinflationary period to follow.  Also not surprisingly, the Buffett and 60/40 allocations, with a lack of real assets, performed the worst during the inflationary 1970s.  Even with the difference in allocations, the spread between the worst-performing allocation, the Permanent Portfolio at 4.12%, and the best, the El-Erian Portfolio at 5.67%, was only 1.84%.  That is astonishing. If you exclude the Permanent Portfolio, all of the allocations are within one percentage point.

FIGURE 41 – Asset Class Returns, 1973-2013




Source: Global Financial Data

And just in case there are readers that want to see the year-by-year nominal and real returns, here they are.

FIGURE 42a – Asset Class Nominal Returns, 1973-2013


Source: Global Financial Data


FIGURE 42b – Asset Class Real Returns, 1973-2013


Source: Global Financial Data

Another way of visualizing the benefits of a simple asset allocation is to generate what is called a periodic table of returns – an obvious nod to the Periodic Table of Elements.  Below we construct a table of seven basic asset classes and the generic “GAA” asset allocation to prove a simple point.  With a broad asset allocation you will never have the best returns of any asset class, but you will also never have the worst!

FIGURE 42c – Asset Class Real Returns, 1973-2013




This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


Warren Buffett mentioned asset allocation instructions for his trust in his 2013 shareholder letter:

“What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. . . . My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors …”

How has that advice performed over time?  You don’t need us to tell you, but with 90% in stocks, you’re going to track the broad stock market.


FIGURE 39 – Asset Class Returns, 1973-2013




Source: Global Financial Data


This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


“Because for any given level of return, if you diversify, you can generate that return with a lower risk; or for any given level of risk, if you diversify, you can generate a higher return.  So it’s a free lunch.  Diversification makes your portfolio better.” – David Swensen, CIO Yale Endowment

We’re not going to spend too much time describing the endowment style of investing – after all, it was the topic of our book in 2009 The Ivy Portfolio.  The hallmarks of the endowment approach are a large allocation to equity-like assets, a global focus, a long time horizon, and active management where it can add value.  While the endowment portfolios are much more complicated and illiquid than our 13 asset classes can cover due mainly to private equity and hedge fund allocations, the managers of the two largest endowments (Harvard and Yale) have, in their books over the years, proposed allocations for individual investors.

David Swensen, CIO for the Yale endowment, mentioned an allocation recommendation for individuals in his book Unconventional Success in 2005.  Former Harvard endowment manager (and former PIMCO co-CIO) Mohamad El-Erian also published an allocation in his 2008 book When Markets Collide.   For some odd reason El-Erian’s allocation didn’t add up to 100%, and a few categories like “special situations” are not directly investable in.  We made some basic assumptions but the overall portfolio targets should be nearly the same.

We proposed a more basic version in The Ivy Portfolio that was meant to replicate the broad endowment space.  While these three basic allocations are solid performers, they underperform the actual top endowments like Harvard and Yale by about 3-4 percentage points per annum.  There are several reasons why (private equity allocation, leverage, factor tilts, possible alpha generation from the managers), and a number of researchers have examined the endowments at length.  One such article is by Peter Mladina titled “Yale’s Endowment Returns:  Manager Skill or Risk Exposure?”  Below we examine how these three allocations have performed over time.


FIGURE 37 – Ivy, Swensen, El-Erian Portfolios

Source: Unconventional Success, 2005, When Markets Collide, 2008, Ivy Portfolio, 2009



FIGURE 38 – Asset Class Returns, 1973-2013

38 38b





Source: Global Financial Data

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